Exporting Natural Gas: How Close Are We?

Natural gas exports could play a significant role in the United States’ energy future, but that might be at least five to 10 years from now as infrastructure must be built and permits approved.

The first step in making natural gas exports a reality came April 16, when Cheniere Energy Partners said the Federal Energy Regulatory Commission (FERC) gave approval to construct and operate four trains to liquefy and export U.S.-produced natural gas at its Sabine Pass LNG terminal in Cameron Parish, La. It previously received export authorization from the U.S. Department of Energy (DOE).

LNG trains are essentially industrial-sized refrigeration modules, chilling the gas to minus 260 Fahrenheit at normal air pressure. This compresses the volume by 600 times, liquefying it. The four trains will have a capacity of about 4.5 million metric tons per annum each. Building next to their existing regasification facility means Cheniere is able to take advantage of existing pipelines and docks, says Andrew Ware, director of corporate communications for Cheniere. Turbines will keep the LNG trains cold and the LNG will be transferred via chilled pipelines to specially designed LNG carrier ships.

Cheniere seeks debt and equity financing commitments to build the first two trains, which are expected to cost about $4.5 billion. Ware says Cheniere expects to begin operating the first train by the end of 2015, with each successive train to be built six to nine months thereafter, with final completion by 2017 or 2018.

“This is going to be a five to 10 year development. In the near-term, building it is expensive and we’re running as fast as we can,” Ware says, regarding the potential development of U.S. LNG exports in aggregate.

There is much hope to create a natural gas export industry in the United States, particularly with the glut of natural gas produced by drilling into shale gas regions. Natural gas prices slipped under $2 per million British Thermal Units earlier in April and NYMEX futures prices have hovered around $2 since, the lowest prices have been in 10 years.

At $2, U.S. prices are among the cheapest globally. Prices are about $18 in Asia and about $11 in the European Union. Eventually prices will rise, but likely not substantially. Cheniere is using a long-term range of $4-$6, Ware says. Other natural gas analysts said for the next few years $5 is likely the top. In its long-range study, the DOE projects prices at Henry Hub to reach $7.07 by 2035.

Creating New Demand Sources

An export market would create another demand source, says Bill O’Neill, principal, LOGIC Advisors, who added the current low prices limit exploration and resource development which is negative long-term.

“It takes time to develop infrastructure, but it’s important to get away from depending on crude oil, so that’s a positive on a long-term standpoint,” says O’Neill. “This creates jobs, so that’s a big plus. But you’re talking five, 10 years at least.”

Vince Lanci, managing director of Cameron Hanover, says creating an export market would make something like the Pickens Plan work. The Pickens Plan is energy strategy created by energy executive T. Boone Pickens that in part calls for using natural gas as a transportation fuel to replace crude oil imports and develop renewable energy sources.

“If (natural gas) prices are so cheap, the government is going to wonder why we are exporting this cheap stuff and importing the expensive stuff (crude oil),” says Lanci. “It might finally get the momentum going to use more here.”

Exports Under Study

While Cheniere received approval by the DOE and FERC to proceed on its Sabine Pass LNG facility, it’s in pre-application mode with FERC to build another facility at its Corpus Christi plant, Ware said.

The DOE has a moratorium to approve any further exports to countries where the U.S. does not have a free-trade agreement. Cheniere has four international customers for its Sabine Pass facilities, located in the U.K., Spain, South Korea and India, Ware says.

The moratorium is in place while DOE has two studies commissioned to review gas exports – one on the economic impact of exports, due at summer’s end, and a second on the domestic energy markets’ impact. The second report found that exports will raise domestic natural gas prices and production, but reduce domestic use and raise Canadian natural gas imports.

Tony Lerner, portfolio manager for an energy hedge fund who also conducts natural gas research for Cameron Hanover, says given the natural gas supply glut the U.S. needs to change its energy mindset.

“For the last 50 years we’ve had a scarcity mentality,” says Lerner. “Now with natural gas, we do have enough. I’ve never understood why we don’t want to export hydrocarbons when we export everything else. We’ve been tremendously reticent to do so and it makes no economic logic.”

Debbie Carlson Debbie Carlson has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

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